Government tinkering with the annual allowance has triggered a big increase in the number of retirement savers facing tax bills for investing too much cash in their pensions.
Official figures show that the cuts have seen the lifetime allowance cut six times in the eight years starting 2011-12 from £1.8 million to the current level of £1.03 million.
But cuts in the annual allowance are causing real problems for many.
The annual allowance caps how much someone can save each year with pension contribution tax relief.
The allowance has dropped from £50,000 to £40,000 – although additional rate taxpayers (45%) can see their allowance clipped to no more than £10,000.
Disrupted plans
The changes have disrupted the savings plans of many high-earners who have found their pension savings left stranded above the annual allowance.
Anyone putting more than the annual allowance into their pension pots faces a tax penalty.
Savers paying annual allowance penalties tripled from 5,430 to 16,590 and the amount contributed more than annual limits rose from £148 million to a £517 million between 2011-12 to 2016-17, which are the years the tax cuts took effect.
“This is likely to be both a delayed effect of the cut in the annual allowance from £50,000 to £40,000 and the impact of the first year of the tapered annual allowance down to £10,000. This suggests that the tax take from these charges could increase significantly in the coming years,” said pension provider Royal London’s director of policy Steve Webb.
The number of savers paying lifetime allowance penalties also escalated from 1,920 handing over £40 million in 2011-12 to 2,340 paying £44 million in 2016-17.
Cash-strapped government
““We are now starting to see the multiple cuts to pension tax relief bite on pension savers,” said Webb.
“Although relatively small numbers of people are affected, the tax bills are huge. On annual allowance charges alone, the amount of contributions which exceeded the annual limit trebled in a single year up to 2016/17. These impacts will get bigger as the ability to carry forward higher unused allowances from previous years works its way out of the system.
“Regrettably, the Chancellor will be looking at these figures with great interest as they suggest that pension tax relief could be a rich source of additional revenue for a cash-strapped government.”
